Canadian Securities Course (CSC) Level 2 Practice Exam 2025 – 400 Free Practice Questions to Pass the Exam

The correct interpretation of the question pertains to the types of risks associated with investments and their behaviors in a portfolio. Default risk, also known as credit risk, refers to the possibility that a borrower will be unable to make the necessary payments on their debt obligations, which can significantly impact securities such as bonds.

This type of risk is intrinsic to the individual securities themselves, based on the issuer’s creditworthiness. Since default risk is linked to specific entities or securities, it cannot be mitigated through diversification across different investments or asset classes. In other words, holding a diverse mix of securities does not eliminate the risk of any one specific issuer defaulting.

The other mentioned risks—foreign investment risk, liquidity risk, and political risk—may have components that can potentially be mitigated through diversification strategies. Foreign investment risk can be reduced by diversifying investments across different geographic regions, liquidity risk can improve with a more liquid mix of assets, and political risk may vary by working within less politically volatile regions. Hence, while all these risks are significant, default risk uniquely remains non-diversifiable due to its connection to the creditworthiness of specific issuers.